It is never too soon to start investing. Investing is the smartest way to secure your financial future and to begin letting your money make more money for you. Contrary to what you may think, investing is not only for people who have truckloads of spare cash. You can get started investing with just a little bit of money and a lot of know-how. By formulating a plan and familiarizing yourself with the tools available, you can quickly learn how to start investing.

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Steps

Part 1 of 4: Getting Acquainted with Different Investment Vehicles

1

Know a little bit about stocks. This is what most people think about when they imagine "investing." Put simply, a stock is a share in the ownership of a business, a publicly-held company. The stock itself is a claim on what the company owns — its assets and earnings. [1] When you buy stock in a company, you are making yourself part-owner. If the company does well, the value of the stock will probably go up, and the company may pay you a "dividend," a reward for your investment. If the company does poorly, however, the stock will probably lose value.

The value of stocks comes from public perception of its worth. That means the stock price is driven by what people think it's worth, not by what it's actually worth. Whatever people think the stock is worth is what it's actually worth.

Stock prices go up when more people want to buy than sell. [2] Stock prices go down when more people want to sell than buy. In order to sell stock, you always need to find a buyer who's willing to buy at the listing price. In order to buy stock, you always need to buy from someone who's selling their stock.

"Stocks" can mean a lot of different things. For example, penny stocks are stocks that trade at relatively low prices, sometimes just pennies. (Most stocks have a price in the dollars.) Stocks can also be bundled into an index, like the Dow Jones Industrials, which is a list of 30 high-performing stocks. Indexes can be useful as an indicator of the performance of the whole market.

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2

Familiarize yourself with bonds. Bonds are issuances of debt, similar to an IOU. When you buy a bond, you're essentially lending someone money. [3] The borrower ("issuer") agrees to pay back the money (the "principal") when the life ("term") of the loan has expired. The issuer also agrees to pay interest on the principal at a set rate. The interest is the whole point of the investment. The term of the bond can range from months to years, at the end of which period the borrower pays back the principal in full. [4]

Here's an example: You buy a five-year municipal bond for $10,000 with an interest rate of 2.35%. You give the municipality your hard-earned $10,000. Each year, the municipality pays you interest on your bond to the tune of 2.35% of $10,000, or $235. After five years, the municipality pays back your $10,000. All in all, you've made back your principal, plus a profit of $1175 in interest (5 x $235)..

Generally, the longer the life of the bond, the higher the interest rate. If you're giving your money away for a year, you probably won't get a high interest rate, because one year is a relatively short period of risk. If you're going to give away your money and not expect it back for ten years, however, you will be compensated for the higher risk you're taking , and interest rate will be higher. This illustrates an axiom in investing: The higher the risk, the higher the return.

3

Understand the commodities market. When you invest in something like a stock or bond, you invest in what it represents; the piece of paper you get is worthless, but what it promises is valuable. A commodity, on the other hand, is something of inherent value, something capable of satisfying a need or desire. Commodities include pork bellies (bacon), coffee beans, or electricity. The thing itself is valuable, because people need and use it.

People often trade commodities by buying and selling "futures." The term sounds complex, but it's easier than it sounds. A future is simply an agreement to buy or sell a commodity at a certain price sometime in the future. [5]

Futures were originally used as hedging insurance by farmers. Here's how it worked. Farmer Joe grows avocados. But the price of avocados is really volatile, meaning that it goes and up and down a lot. At the beginning of the season, the wholesale price of avocados is $4 per bushel. If farmer Joe has a bumper crop of avocados but the price of avocados drops to $2 per bushel in April at harvest, farmer Joe has probably lost a lot of money.

Here's what Joe does in advance of harvest as insurance against such a loss. He sells a futures contract to someone. The contract stipulates that the buyer of the contract agrees to buy all of Joe's avocados at $4 per bushel in April.

Now Joe has insurance. If the price of avocados goes up, he'll be fine because he can unload his avocados at the usual market price. If the price of avocados drops to $2, he can unload his avocados at $4 to the buyer of the contract and make more than his competition.

The buyer of a future always hopes that the price of a commodity will go up beyond the futures price he paid. That way he can lock in a lower price. The seller hopes that the price of a commodity will go down. He can buy the commodity at low (market) prices and then sell it to the buyer at higher-than-market prices.

4

Know a bit about investing in property. Investing in real estate can be a risky but lucrative proposition. There are lots of different ways that you can invest in property. You can buy a home and then become a landlord. You pocket the difference between what you pay on the mortgage and what the tenant pays you in rent. You can also decide to flip homes; that's where you buy a home in need of renovations, fix it up, and sell it as quickly as possible. You could even invest in mortgages bundled together as complex securities (CMOs or CDOs). Real estate can be a very profitable asset, but it is not without substantial risks involving property maintenance and market values.

Some people think that home values are guaranteed to go up. Recent history has shown otherwise. As with many investments, real estate values do invariably rise if given enough time. If your time horizon is short, however, property ownership is not a guaranteed investment. [6]

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Part 2 of 4: Mastering Investment Basics

1

Buy undervalued assets (buy low, sell high). If you're talking about stocks and other assets, you want to buy when the price is low and sell when the price is high. If you buy 100 shares of stock on January 1st for $5 per share, and you sell those same shares on December 31st for $7.25, you just made $225. That may seem a paltry sum, but when you're talking about buying and selling hundreds or even thousands of shares, it can really add up.

How do you tell if a stock is undervalued? You need to look at a company closely — its projected revenue, its P/E ratio, its dividend yield — instead of looking at just one aspect and making a decision based on a single ratio or a momentary drop in the stock's price. Use your critical thinking skills and your common sense to analyze whether a stock is undervalued.

Ask yourself some basic questions: What will the market be for this stock in the future? Will it look bleaker or better? What competitors does this company have, and what are their prospects? How will this company be able to earn money in the future?[7] These should help you come to a better understanding of whether a company's stock is under- or over-valued.

2

Invest in companies that you understand. Perhaps you have some basic knowledge regarding some business or industry. Why not put that to use? Invest in companies or industries that you know, because you're more likely to understand revenue models and future success. Of course, never put all your eggs in one basket. [8] That would be silly and risky. Wringing value out of an industry whose gears you understand will increase your chances of being successful.

3

Don't buy on hope and sell on fear. It's very easy and too tempting to follow the crowd when investing. We often get caught up in what other people are doing and take it for granted that they know what they're talking about. Then we buy stocks when other people buy them and sell stocks when other people sell them. Doing this is easy. Unfortunately, it's probably the easiest way to lose money. Invest in companies that you know and believe in — and tune out the hype — and you'll be fine.

When you buy a stock that everyone else has bought, you're buying something that's probably worth less than its price. When the market corrects itself, you could end up buying high and selling low — just the opposite of what you want to do. Hoping that a stock will go up just because everyone else wants it to is foolish.

When you sell a stock that everyone else is selling, you're selling something that may be worth more than its price. When the market corrects itself, you've again bought high and sold low. Fear of losses may well prove to be a poor reason to dump your stock.

Interest rates on bonds normally reflect the prevailing market interest rate. Say you buy a bond with an interest rate of 3%. If interest rates on other investments then go up to 4% and you're stuck with a bond paying 3%, not many people would be willing to buy your bond from you when they can buy another bond that pays them 4% interest. For this reason, you would need to knock down the price of your bond in order to sell it. The opposite situation applies when bond rates are falling.

5

Diversify. Diversifying your portfolio is one of the most important things that you can do, because it mitigates your risk. Think about it: If you invest $5 in each of 20 different companies, all of the companies would have to go broke before you would lose all your money. If you invested the same $100 in just one company, only that company would have to fail for all your money to disappear. Thus, diversified investments "hedge" against each other and keep you from losing lots of money because of the poor performance of a few companies.

Invest in many different types of assets and debts to diversify your portfolio. Your portfolio should ideally have a good mix of stocks, bonds, commodities, and other investments. Often when one class of investment performs poorly, another class performs nicely. It is very rare to see all asset classes declining at the same time.

6

Invest for the long run.[10] Choose stable investments with impressive histories, and hang on to them for a long time. If they really are stable companies (and it's up to you to identify them as such), they will weather the ups and downs of the market over time. Ultimately, holding your money in the stock market for longer periods of time nets you more than playing day-trader, which involves buying and selling stock dozens, even hundreds, of times per day. Here's why:

Brokerage fees add up. Every time you buy or sell a stock, a middleman known as a broker takes a cut for connecting you with another trader. These fees really add up, cutting into your profit and magnifying your losses. Don't be penny-wise and pound-foolish.

It's almost impossible to predict big gains and losses. On days when the stock market makes a serious move up, it's possible to make a killing. Knowing when those days are going to be, however, is next to impossible. If you keep your money invested, you will automatically benefit from these jumps. But if you keep pulling your money out (even temporarily), you'll have to anticipate exactly when prices will climb. It's not impossible, but it's about as likely as winning the lottery.

The stock market, on average, rises. From 1900 to 2000, the stock market averaged a 10.4% return per year. That's huge, if the power of long-term compounding is allowed to work. Here are some more statistics: Investing $1,000 in 1900 would have netted you $19.8 million by 2000. At a 15% return, it would take just 30 years to turn $15,000 into $1 million. [11] Set your sights on the long term, not the short. If you're worried about all the dips along the way, find a graphical representation of the stock market over the years and hang it somewhere you can see whenever the market is undergoing its inevitable--and temporary--declines.

7

Know how to short sell. Instead of betting that the price of a security is going to increase, "shorting" is a bet that the price will drop. When you short a stock (or bond or currency), you're credited with an amount of money, as if you bought it. Then you wait for the stock to go down. If it does, you "cover," meaning you buy back the shares at the current (lower) price. The difference between the amount credited to you in the beginning and the amount you paid at the end is your profit.

Short selling can be dangerous, because it's no easier to predict a drop in price than a rise. If you use shorting for the purpose of speculation, be prepared to get burned. Stock prices often go up, and in such cases you would be forced to buy back stocks at a higher price than what was credited to you initially. If, on the other hand, you use shorting as a way to hedge your losses, it can actually be a good form of insurance.

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Part 3 of 4: Starting Out

1

In the U.S.invest in a Roth IRA as soon in your working career as possible. If you're earning taxable income and you're at least 18, find a Roth IRA (if you don't already have one). A Roth IRA is a retirement account to which you can contribute up to $5,500 every year. This money gets invested and begins to grow. Best of all, if you wait until you're 65 before taking the money out, it's tax-free. A Roth IRA is one of the best investments you can make if you're just starting out and want to save for retirement.

Investing as soon as possible in a Roth IRA is important. The earlier you begin investing, the longer your investment has time to grow. If you invest just $20,000 in a Roth IRA by the time you're 30 years old, and then stop investing any more money in it, by the time you're 72 you'll have a $1,280,000 investment (assuming a historically realistic annual return of 10%). This example is merely illustrative. Don't stop at 30. Keep adding to your account. You will have a very comfortable retirement if you do.

How can a Roth IRA grow like this? By compound interest. The money that you earn as dividends and interest on your investment gets "reinvested" into the account, creating a bigger pot. That means bigger dividends and interest, and the cycle continues. Basically, your interest is earning interest. Money in your Roth IRA will double in value about every seven years (assuming a 10% return). [12]

2

Invest in your company's 401(k). Like a Roth IRA, a 401(k) is a retirement savings account that lets you make pre-tax contributions to a fund that gets invested. Unlike with an IRA, your employer will often match funds that you contribute to your 401(k), up to a certain percent of your salary. That means if you contribute $300 to your 401(k) fund out of every paycheck, your employer will contribute another $300. Matching funds are the closest thing you'll ever get to "free money." Take advantage of it!

3

Consider investing mainly in stocks but also in bonds to diversify your portfolio. From 1925 to 2000, stocks outperformed bonds in every 25-year period you would care to examine. [13] That means if you're looking for a solid investment, stick mostly with stocks. It's good, however, to add bonds to your portfolio for the sake of diversification. The older you get, the more appropriate it becomes to own bonds (a more conservative investment). Re-read the above discussion of diversification.

4

Start off investing a little money in mutual funds. A mutual fund is a group of securities bought by investors who have pooled together their money. An index fund is a mutual fund that invests in a specific list of companies of a particular size or economic sector. Mutual funds mitigate risk by investing in lots of different companies. You could do much worse than investing in the companies listed on indexes like the Dow Jones Industrials or the S&P500.

Mutual funds come in different shapes and sizes. They are professionally managed, meaning they carefully and knowledgeably pick their investments. They can be bond-heavy, stock-heavy, or invest in both equally. They can buy and sell their securities frequently, or they can be more passively managed (as in the case of index funds).

Mutual funds come with costs. There may be charges (or "loads") when you buy or sell shares of the fund. There is also the management expense ratio (MER), calculated as a percentage of a fund's assets. Some funds charge a lower-percentage fee for larger investments. Expense ratios typically range around one percent of an investment. There may also be a 12b-1 fee assessed to defray a fund's marketing expenses.

5

Make sure you're insured. Having a little bit of financial insurance is a good idea for two reasons. First, if you happen to lose all your invested money, you'll have something to fall back on, because you won't have lost everything. Second, it will allow you to be a bolder investor, because you won't be worried about risking every single penny you own.

Save up an emergency fund. This would represent six to eight months' worth of expenses, set aside in savings in case of an emergency or something like a lost job.

Get current on all your insurance. This includes auto, homeowner's and life insurance. You may never need it, but you'll be happy to have it if you do.

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Part 4 of 4: Making the Most of Your Money

1

Consider using the services of a financial planner or adviser. Many planners and advisers require that their clients have an investment portfolio of at least a minimum value, such as $100,000 or more. This means it could be hard to find an adviser willing to work with you if your portfolio isn't very established. In that case, look for an adviser interested in helping smaller investors.

How do financial planners help? Planners are professionals whose job it is to make you more money, ensure that your money is safe, and guide you in your financial decisions. They draw from a wealth of experience at allocating resources. Most importantly, they have a financial stake in your success: the more money you make under their tutelage, the more money they make.

2

Get an investment broker. A broker is someone who executes trades for you. It's a lot easier to execute trades with a broker than it is trying to do it yourself. There are many kinds of brokerage services available. Many online brokers offer no-frills service and a low, flat fee per trade. You can also do business with a full-service brokerage firm that provides financial advice and portfolio management. Brokers usually require a minimum deposit for establishing an account, so make sure you have saved enough cash to get started.

3

Buck the herd instinct. The herd instinct, alluded to earlier, is the idea that just because a lot of other people are doing something, so should you. [14] A lot of successful investors do uncommon things that other investors think are stupid at the time.

People probably thought that John Paulson was mad when he shorted sub-prime mortgage positions in 2007, essentially making a big bet that they were going to fail. At the height of the housing craze, people still thought that prices would only go up and that mortgage-backed securities were free money. When the bubble popped, Paulson made over $3.7 billion in 2007 alone. [15]

Invest in smart opportunities when other people are scared. In 2008 as the housing crisis hit, the stock market shed thousands of points in a matter of months. A smart investor who bought stocks as the market bottomed out made a killing when stocks rebounded.

4

Know the players in the game.[16] Which institutional investors think that your stock is going drop in price and have therefore shorted it? What mutual fund managers have your stock in their fund, and what is their track record? While it helps to be independent as an investor, it's always helpful to know who's playing the game and what they're up to.

5

Continually re-examine your investment goals and strategies. Your life and the conditions of the market change all the time, so your investment strategy should change with them. Never be so committed to a stock or bond that you can't see it for what it's worth. While money and prestige may be important, never lose track of the truly important, non-material things in life: your family, friends, health, and happiness.

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One of the most painless and efficient ways to invest is to dedicate a portion of each paycheck to regular contributions to an investment account. It is surprising how quickly such a plan can result in a substantial amount of money. Then let time work its magic: compounding can pleasantly surprise you even more.